The bill, which also included plans for a 20 per cent cut to the public subsidy of tuition costs and the extension of student loans to private colleges and foundation degrees, prompted widespread fears of spiralling tuition fees, especially at the elite Group of Eight universities.
Most vice-chancellors supported deregulation, but opposed the cuts.
In recent weeks, Australia’s minister for education, Christopher Pyne, said that if the reforms were not passed he would cut funding for Australian large science facilities, known as the National Collaborative Research Infrastructure Strategy, which employ 1,700 scientists.
However, when the crossbenchers who hold the balance of power in the Senate refused to budge, Mr Pyne withdrew his threat and made a last-minute offer to move the cuts to a separate bill, to be debated at a later date.
However, senators voted by 34 votes to 30 on 17 March against allowing a second reading of the bill, which would have allowed amendments to be considered.
An earlier version of the bill was defeated in the Senate last December, but it was reintroduced into parliament the following day.
Mr Pyne has now vowed to reintroduce the bill for a third time.
“Few dispute that without reform, Australia’s higher education system will steadily decline…We will not give up. This reform is too important,” he said.
Belinda Robinson, chief executive of Universities Australia, said the Senate’s decision “opens the way for a national discussion on a long-term, sustainable and predictable funding model for university education and research. Our universities, and the hopes and aspirations of our children, can no longer afford to be treated as a convenient political football.”
She added that the debate had “achieved a remarkable political consensus on one critical factor: that the current state of public investment in universities is insufficient for maintaining and enhancing the quality expected by students, employers and the community.”
Vicki Thomson, chief executive of the Group of Eight, said the Senate had “let Australia down” by failing to fix the “broken” funding system.
Peter Lee, chair of the Regional Universities Network, urged politicians to “resolve this impasse as a matter of priority”.
But Jeannie Rea, president of the National Tertiary Education Union, welcomed the bill’s defeat.
“All senators who voted against the government’s unfair, unprincipled and unsustainable higher education policies have earned the gratitude of university students, staff and communities; and future students,” she said.